What should you know about the EU Taxonomy?

Why a Green Taxonomy ?

To face the growing interest of investors for financial products with a sustainability objective, the European Commission has published over the past few months new directives to give to European financial institutions a common language and a clear definition of what is a sustainable investment.

As part of these delegated acts, the EU Commission called for the creation of a common classification system for sustainable economic activities, the so-called Taxonomy Regulation.

What is the Taxonomy Regulation ?

The Taxonomy Regulation was published in the Official Journal of the European Union on 22 June 2020 and entered into force on 12 July 2020.

On 6 July 2021, the Delegated Act supplementing Article 8 of the Taxonomy Regulation was adopted.

The taxonomy regulation offers a classification system, establishing a list of environmentally sustainable activities.

Its objective is to help financial market participants to classify their financial products regarding their environmental sustainability with a common methodology.

It avoids each country or financial institution to develop their own taxonomies, with a high risk of greenwhasing.

For the moment, the taxonomy regulation only covers six environmental objectives.

A second delegated act for social objectives will be published in 2022.

The European taxonomy, a green taxonomy

Activities which are considered environmentally sustainable economic activities in the current taxonomy are the following :

  1. Climate change mitigation
  2. Climate change adaptation
  3. The sustainable use and protection of water and marine resources
  4. The transition to a circular economy
  5. Pollution prevention and control
  6. The protection and restoration of biodiversity and ecosystems

To gain taxonomy alignment, the economic activity must contribute substantially to at least one environmental objective in the list and do no significant harm to the other environmental objectives.

The European Commission will give further information about this list by defining technical screening criteria (TSC) for each environmental objective through delegated acts.

A first climate delegated act on sustainable activities for climate change adaptation and mitigation objectives was approved in principle on 21 April 2021, and formally adopted on 4 June 2021 for scrutiny by the co-legislators.

Complementary delegated act for the other five environmental objectives should be published this year.

The European Union has created a platform on sustainable finance to allow financial market participants and policy makers to contribute to the discussion about sustainable economic activities.

What about polemical activities like gas or nuclear energy?

Since january 2022, after a long and polemical debate, gas and nuclear power have been considered environmentally sustainable.

This new decision has raised a furious backlash among Member States.

“Natural gas and nuclear [power] cannot be considered green or sustainable technologies in the Taxonomy regulations, regardless of the possibility of making continued investments in both,”

Spain’s Ministry for the Ecological Transition.

Germany’s economy minister led on his side the charge against “greenwashing” while Austria’s government repeated its threat to sue the European Commission if the plans go ahead.

The EU executive was accused of trying to bury the proposals by releasing long-delayed technical rules on its green investment guidebook to diplomats on New Year’s Eve, hours before a deadline expired.

The debate is thus not over yet…

What about a social taxonomy?

For the moment, the Taxonomy Regulation only covers environmentally sustainable activities.

In July 2021, the Platform on Sustainable Finance published two draft reports about possible extensions of the taxonomy to social economic activities that do not significant harm to the environmental objectives.

A social taxonomy is thus expected for 2022.

The definition of a social taxonomy is however even more challenging than an green taxonomy.

If carbon footprint can be measured quite objectively and scientifically, the measurement of the substantial contribution of a company to education or health care is much more delicate and subjective.

At the time of publication, the proposals about a potential social taxonomy are thus largely theoretical.